The Independent Directors’ fraternity in India has taken a centre stage in public discourse with respect to their remuneration. Impeded by uncertainties such as: what exactly is the incentive to work for a company as an Independent director? How is their work different from a philanthropic directorial stint, keeping in mind the minimum amount of remuneration being awarded to them? These uncertainties have hindered their growth and credibility in the boardroom.
In the past few years, the market regulators and the watchdogs of corporate ethics have woken up to the vagaries of power abuse. To provide the institution of Independent Directors a sense of entitlement and belonging, they are being awarded a minimum sitting fee and an annual remuneration amounting to a sum not more than one percent of the company’s total revenue. However, fixing the amount of remuneration is dependent on deciding its implication i.e. if the company where they are serving as an Independent director is rewarding them for their ethical vigilance and manoeuvring, or their services are just being distinguished from philanthropy.
The challenge lies hitting the right balance between an absolutely negligible remuneration and a fairly high one. The corporate Industry has taken cognizance of this and has dynamically adopted a very elastic model. At present, a fixed sitting fee is awarded to the Independent Directors for each board meeting attended and distributable profits are paid as commission.
The Kotak Committee recently recommended certain guidelines for ethical boardroom practices. According to the report published, the minimum total remuneration for an Independent director per year should be INR 5 lakhs for top 500 companies by market capitalization. Furthermore, it recommends that a minimum sitting fee should be paid to the Independent Director for every board meeting:
- INR50,000 for top 100 companies by market capitalization.
- INR25,000 for next 400 companies by market capitalization.
Avoiding a myopic view of the argument for a respectable remuneration to Independent directors, the case for rewarding them adequately for their services is of seminal importance. Independent directors have a pivotal role to play in good governance of the listed entities. Therefore, a risk-reward balance in the compensation payable to Independent directors would make it attractive for competent people to accept appointments as Independent directors.
Serving as an Independent Director on a board requires them to involve themselves with the various management committees of the company. The Companies Act, 2013, provides for the mandatory appointment of independent directors in following committees so as to meet the corporate governance requirements:
- Remuneration and Nomination Committee
- Audit Committee
- CSR Committee
Independent Directors are required to play an integral role in the governance of the company, which in tandem exacerbates their liability. On the other hand, an ever decreasing and fluctuating remuneration policy proves to be frustrating and counter-productive.
A way out of this quagmire could be to equalize the monetary remuneration that the company doles out to its directors. This can be done by adopting a comparative performance evaluation of the directors on board by an independent agency. Hence, creating a conducive environment for equality and unbiased workmanship.
Being the conscience keeper of the company, it is very important for Independent Directors to be truly independent in their thoughts and actions. They should be able to dissent from the majority shareholders or promoters and not necessarily and imperatively tow their line in fear of a financial or social backlash. The very rationale behind keeping a minimal sitting fee and a cap on their maximum remuneration is to liberate them from obligations to the board. But the question still looms; how much is too little or too much?
Author: Neel Kanth
Disclaimer: THE STATEMENTS HEREIN REPRESENT THE CURRENT OPINION AND BELIEFS OF THE AUTHOR ONLY AND NOT THE ASSOCIATION OF INDEPENDENT DIRECTORS OF INDIA (AIDI). UNDER NO CIRCUMSTANCES SHOULD ANYTHING IN THIS POST BE CONSTRUED AS INVESTMENT, LEGAL, TAX, REGULATORY, FINANCIAL, ACCOUNTING OR OTHER ADVICE.